Secure Income for Fidelity Investors

With most things in life, perspective is everything, asserts mutual fund expert John Bonnanzio; here, the editor of Fidelity Monitor & Insight looks at fixed-income funds in the Fidelity family.

With the average Fidelity stock fund up almost 19% this year, the 1.3% return of Fidelity Conservative Income Bond (FCONX) doesn’t seem particularly alluring. Likewise, Fidelity U.S. Bond Index (FXNAX), up 2.9%, feels like another comparative laggard.

While Conservative Income’s performance is far from eye-catching, when this ultrashort-term bond fund is used as an alternative to a money market fund (which is how we use it in our Growth & Income and Income Model portfolios), its appeal becomes apparent, especially for income-oriented investors and those who are nervous about stocks and bonds alike.

Between December 2016 and December 2018, the Fed raised rates seven times from 0.25% to the current 2.50%. As money market funds only hold very short-term “paper,” their yields move in near-perfect sync with the Federal Funds target rate.

During that same period, for example, the yield on Money Market (Fidelity’s only “prime” fund that’s available to retail investors) rose from a bare-bones 0.54% to its current 2.23%.

For the foreseeable future, however, yields on both money funds and ultrashort-term bond funds are likely staying put.

Though first quarter GDP accelerated to an annual rate of 3.2%, that figure is both subject to later revisions (up and more likely down) plus a bit of derision from naysayers. (Some pundits think the rate can’t be sustained.) Regardless, inflation is certainly quiescent, and for the time being, rate hikes are on hold.

While it’s the case that yields on money funds and Conservative Income — and its tax-free counterpart Fidelity Conservative Income Municipal Bond Fund (FUEMX) — have barely budged, further out on the yield curve fixed-income investors are hardly being paid much of a yield premium for assuming additional interest-rate risk.

That takes us back to both our ultrashort bond funds! (For ease of comparison, we’ll stick with the taxable variety.) While Fidelity’s taxable money funds are yielding a hair’s-breadth above 2%, Conservative Income yields 2.51%.

And whereas Fidelity's Money Market offer no opportunity to appreciate in value, Conservative Income can provide modest upside potential. So far this year, it’s up 1.3% whereas Fidelity money market’s compounding income translates into a year-to-date total return of 0.7%.

Granted, Fidelity Short-Term Treasury Index (FUMBX) yields more and has a better total return, but that’s because it has substantially more rate-risk (its duration is 2.6 years versus only 0.2 years for Conservative Income).

Case in point, Short-Term’s relative volatility (as measured over three years) is 0.14 versus 0.03 for Conservative Income Bond. (Statistically speaking, Conservative Income Muni actually has zero risk, though its steady NAV masks its modest credit-risk.)

The bottom line is this: Fidelity’s Conservative Income funds are presently suitable, higher-yielding alternatives to money funds, though they are a bit riskier and may not provide the liquidity of money markets.

At the same time, if you’re looking at the stock market’s meteoric rise this year and have some fears that you are over-exposed to stocks while not especially enamored with today’s bond yields, you are not without alternatives.